Shares Rise in Volatile Trade

However, after a late afternoon rally, Shenzhen's B shares nonetheless closed 3.4% up at 336.39 points. Shanghai B shares ended 1.1% up at 156.88 points.

The total volume of Shenzhen B shares increased to HK$3.51 billion Friday, compared with the previous HK$3.42 billion. Total transactions in Shanghai B shares remained subdued at $248.69 million, down from the previous $352.38 million. China's A shares are priced in yuan for domestic investors, and B shares are priced in U.S. dollars and Hong Kong dollars.

Both the Shanghai and Shenzhen B share markets closed the morning down, with Shenzhen's B shares dropping sharply during the session. With both B share indexes near to record highs, profit-taking pressure is mounting. However, at the same time, Chinese investors hold a large supply of foreign exchange, some of which is still pouring into the market to buy the foreign-currency denominated shares.

While profit-taking was going on in the morning, "many investors were closely watching the market and preparing to buy cheap stocks ... because the demand for B shares continues to overwhelm supply," said Yang Dongmei, an analyst at China Southern Securities in Shenzhen.

Fears that authorities might crack down on foreign exchange that had been obtained illegally to buy the B shares is adding to volatility in Shenzhen, analysts said.

In Shenzhen, seven B shares companies ended at their daily upside limit, compared with two in Shanghai.

There was no particular logic to the rises, analysts said. But star performers included the two "particular transfer" stocks that made three years of losses and trade only on Friday afternoons. Three "special treatment" stocks that have made two consecutive years of losses also hit their 5% upside limit.

Both the Shanghai and Shenzhen B share markets are now trading at price/earnings ratios of approximately 35 times, still well below their A share counterparts, which trade at an average P/E of 50 times more.

However, following the B share markets' heady rises, an analyst for a foreign trading house said European brokerage predicted regulators would step in to increase the supply of B shares in the market, for example by allowing more B share initial public offerings and rights issues.

Foreign shareholders holding non-tradable shares are also likely to get quick approval from regulators should they want to part with their shares, he said.